The Australian Renewable Energy Agency (ARENA) contributed $1.5 million in funding towards the project.

ARENA chief executive Ivor Frischknecht said blending hydrogen with natural gas could help solve the challenge of energy storage.

"If you think about having a system that runs completely on wind and solar, which I think we will within a few decades … there's going to be a big storage requirement and we need that across a variety of different storage mechanisms," Mr Frischknecht said.

"If you have a lot of rooftop solar, for example, the electricity network can't deal with a lot of rooftop solar being fed into it.

"You could potentially, on a very local level, turn some of that electricity into hydrogen and store it."

While blended natural gas and hydrogen fuels are used overseas, it remains to be seen whether Australia's gas pipelines will be able to transport them.

"Some of the existing natural gas lines are ready for it and some need some work before they will be," Mr Frischknecht said.

The micro-grid is expected to produce its first hydrogen by the first quarter of 2019.